Individuals who continually monitor the financial markets seeking mispriced securities:
A) earn excess profits over the long-term.
B) make the markets increasingly more efficient.
C) are never able to find a security that is temporarily mispriced.
D) are overwhelmingly successful in earning abnormal profits.
E) are always quite successful using only historical price information as their basis of evaluation.
F) None of the above.

Question

Quizplus · Accepted Answer

The constant monitoring of financial markets seeking mispriced securities leads to the correction of market inefficiencies. As a result, the actions of these individuals make the markets more efficient because they buy undervalued securities and sell overvalued securities, which means that they are helping to eliminate the mispricing. However, the earning of excess profits over the long-term is unlikely, as any temporary mispricing is quickly corrected by changes in market conditions. Additionally, using only historical price information as the basis for investment decisions is not entirely successful.

Individuals Who Continually Monitor the Financial Markets Seeking Mispriced Securities